Harris Simmons is no stranger to controversy.
By virtue of geography, the Zions Bancorp. chairman and CEO has been on the front lines of the banking industry's battles against credit unions and companies seeking a back door into the banking business through industrial loan charters. Utah, Zions' home state, has more permissive laws on both types of rivals than most other states.
But such competitive threats have been the least of Simmons' concerns lately. Zions, long considered a risk management leader, proved less seaworthy than expected when the crisis hit. The $51 billion-asset company, with operations in 10 western states, found itself with too many residential construction loans on its books. It also had a fistful of collateralized debt obligations gone bad, and reported losses of $900 million on its securities portfolio, which made a shaky capital situation worse.
Only now are the numbers starting to look promising. After posting losses totaling $1.8 billion over nine consecutive quarters, Zions finally eked out a $14.8 million profit in the first quarter of this year. Nonperformers still make up 4.54% of its loans, but they are dropping. Net chargeoffs declined 44% from the prior quarter. Deposits are growing, the net interest margin is on the rise and the company's Tier 1 common equity ratio is a comfortable 9.27% of assets.
"They've made it through the worst of the crisis," said David George, an analyst with R.W. Baird & Co. "It's safe to say they're going to make it."
For a while there, things were looking dicey. Some thought Zions might not survive. That it has is a testament to the company's culture, creativity and the fortitude of Simmons, 56, who said that in the darkest hours he went through the loan book deal by deal, and "never had a bad night's sleep over credit issues."
What worried him more was the damage to Zions' image, and the harm that might do to the Salt Lake City company's liquidity position. Share prices plunged from $87 in 2007 to about $6 two years later, making a capital raise highly unattractive right when the company needed one most. "This is an industry where perception can quickly become reality," Simmons said.
To avoid the dilution that has accompanied big equity offerings by other capital-hungry regionals, Zions has instead dipped into the market when the price is high enough for small sales, netting $1.7 billion over three years. The strategy appears to have worked, but analysts do not like the implied cap on the share price, nor the looming need for a big offering.
"It's an overhang on the stock," Scott Siefers, a managing director with Sandler O'Neill & Partners, complained. "You have a chronically increasing share count that's dilutive."
Simmons described Zions' capital structure — which includes $1.4 billion from the Troubled Asset Relief Program that still must be repaid and some debt conversions into preferred stock — as "messy."
To make matters worse, the company was slapped early this year with an $8 million fine for anti-money-laundering violations under the Bank Secrecy Act. Simmons said the company's former NetDeposit subsidiary, a leader in remote deposit capture, "missed doing an adequate job of screening" smaller transactions from Mexican correspondents in 2006 and 2007. Zions sold the business last year to BankServ.
All told, it has been an unsettling few years for a company that had grown accustomed to winning plaudits as a well-run shop. Now on the mend, Zions is responding to the perceived control issues — and a genuine need to get a better handle on credit quality at the corporate level — by tweaking its decentralized operating model.
The idea of this "super community" model, employed in various iterations across the industry, is to marry bigger-bank lending limits and product menus with the local decision-making of a community bank.
"When there are no problems, it's a very easy, likable story: 'We might be a $50 billion bank, but we're actually a bunch of $5 billion banks, so we can compete on service like a community bank,' " Siefers said. "But when conditions get tougher, you don't have the centralized controls where someone can say, 'We have to stop doing X immediately.' "
For Zions, which operates eight separately chartered and branded affiliate banks — Amegy Bank in Texas, Vectra Bank in Colorado and California Bank and Trust Co. among them — the financial crisis and its fallout exposed some cracks, including a way-too-high 22% of loans in the construction and development category.
Simmons, who argues that the structure itself had little to do with the company's troubles, said he will stick with it. "I really believe that banking is done best at the local level, having strong relationships with your markets and customers," he said. But he conceded that if there had been closer tracking of how loans at the individual banks collectively affected the company, the concentration levels never would have gotten that high.
And so, Zions' management decided to morph its approach in one subtle, but very significant way: Last June, the company hired Kenneth Peterson, a 33-year Wells Fargo veteran, as executive vice president and chief credit officer, and gave him the latitude and budget to centralize and strengthen the credit culture, in the hope that this will help avoid trouble in the future.
In less than a year, Peterson has raised the number of direct reports in his office to 12, from two, adding dedicated experts to oversee key lending lines, corporate loan concentration and a new centralized credit training program. He has also overseen some technology enhancements and set out to refine credit policies and procedures that will be overseen from Salt Lake City.
"In a period like this, you always make changes and react to what you've learned, and you come out stronger for it," Simmons said.
"Centralization isn't a cure-all," but the lesson, he said, is not to let any part of the loan portfolio get too large relative to the whole. "That's something we, and a lot of other banks, missed before the crisis."
